XXXVI CONFERENZA ITALIANA DI SCIENZE REGIONALI
Extended abstract AISRE
AN EMPIRICAL INVESTIGATION ON THE RELATIONSHIP BETWEEN
GLOBALISATION AND DECENTRALISATION: THE “VOICE” OF THE
TERRITORY
A. Filippettiª e G. Testa§
[WORK-IN-PROGRESS - PLEASE NOT FOR CIRCULATION OR WEB SITE]
Abstract
In this paper we first re-assess the relationship between globalisation and decentralisation employing a
more refined measure of decentralisation. We then investigate the conditions under which the voice of the
territory can be actually transferred into decentralization reforms. In particular, we study whether the
presence of specific democratic factors encourages the transformation of the demand for more autonomy into
actual process of decentralization. We use a panel of 40 advanced and emerging countries over the period
1970-2006. The analysis employs data from KOF indicators of globalization and the overall Regional
Authority Index. Our results confirm the presence of a relationship between globalization and
decentralization. We also find evidence of a role of democracy as a mediating factor between globalization
and decentralization: countries with stronger democracies are more likely to respond to globalization with
actual decentralization reforms.
Keywords: Fiscal decentralization; globalization; panel data analysis.
ª
ISSiRFA-CNR, Consiglio Nazionale delle Ricerche, Via dei Taurini 19, 00185
–
Roma.
[email protected] and London School of Economics and Social Science, London UK.
§
Corresponding author. Dipartimento di Economia, Università degli Studi di Foggia, Largo Papa Giovanni
Paolo II, 71100 – Foggia. [email protected]
1
1.
Introduction
This paper contributes to the increasing interest about the role of globalisation on decentralisation.
Globalization affects the territories through several channels, by reconfiguring the labour market through
offshoring, by increasing tax competition between them, through the overall effects on the distribution of
income, i.e. inequality. As a result, it has been argued that the territories raise their ‘voice’ in response to the
challenges posed by globalization, and demand for more autonomy, in the form of more political power,
fiscal resources, administrative responsibility. An increasing number of empirical works have therefore
explored the connection between globalization and decentralization.
In this paper we first re-assess this relationship employing a more refined measure of decentralisation. We
then investigate the conditions that are necessary in order for the voice of the territory to be actually
translated into decentralization reforms. We argue that the demand for autonomy is a necessary but not
sufficient condition to persuade central governments to give away more power to local governments. Taking
a more realistic approach on the political processes that shape the distribution of power between levels of
governments over time, we assume that central governments tend to be in general reluctant to give away
powers to local governments for a number of reasons, e.g. lack of trust in their competences and
accountability, risks of financial moral hazards, risk of political opposition. We therefore explore the
conditions under which central governments are more inclined (or feel more obliged) to decentralise power
and resources towards the periphery. In particular, we study whether the presence of specific democratic
factors encourages the transformation of the demand for more autonomy into actual process of
decentralization.
As a matter of fact, the configuration of power among levels of government is the result of political
processes and tensions, as well as historical legacy. The simple fact that territories demand more autonomy
does not guarantee that central governments will be persuaded to give power away. One can think of two
examples of territories demanding for autonomy, namely the U.K. and Italy. In the first case, even though
regions like Scotland have for a long time been demanding for more autonomy, central governments have
resisted. It is not by chance that Scotland finally made a referendum for their independence, because their
demand has not been met in the past. In a recent Report from the Institute for Government one can read
“While all parties have been good at making commitments to devolve power, governments have found it
hard to implement decentralising reforms in practice […] In light of this mixed record, many have become
somewhat disillusioned with political promises, believing that national parties would prefer to keep hold of
political power” (p. 3 our emphasis)
The case of Italy is quite different. In 2001, by emending the Constitutions, Italy has put in place a reform
that provides regional and local governments with stronger political accountability (direct elections), and (in
principle) fiscal autonomy. In fact, the voice of the territories for more autonomy and power, mostly the
Northern regions, was strongly supported by a political party, the Lega Nord (League of Northern regions).
The Lega Nord was basically a local party that has always been below ten per cent in national elections.
Despite this, it managed to bring the issue of decentralization at the top of the various governments’ agenda
in the 1990s, until it was implemented in 2001. In this case, the dynamics of decentralization in Italy have
followed a partisan logic. As Palermo and al. argue, decentralization “has been driven by the need for
national parties to compete electorally or form governing coalitions with the Northern League”.
As these two cases show, the demand for autonomy coming from the territory can lead to different,
indeed opposite, results in terms of decentralization reforms. Hence while the voice of the territories is a
necessary condition to encourage decentralization, whether this will be actually translated into actual
decentralization might depend on other political factors.
2
One possible channel is the type of electoral system, namely majoritarian versus proportional. The
electoral system of the U.K. (strongly majoritarian) has made possible (with rare exceptions) to form a
government in which one of the two major national parties would rule. By contrast, the proportional system
in place in Italy has always led to coalition governments in which even small and local parties, like the case
of the Lega Nord, can exert a considerable amount of power.
More generally, one could argue that stronger democracies are more effective in bringing the voice of the
territory towards the central state. Here the state could be more responsive to local political stances. For these
reasons in this paper we are concerned in investigating the presence of factors that make the demand for
autonomy rising from territories more likely to be transposed into actual decentralization reforms.
We investigate the impact of globalisation on decentralisation, and federalism by employing the
indicators on regional authority (Liesbet, Marks, and Schakel 2008) in a panel data analysis. We measure
globalization by the KOF indices of globalization by Dreher (2006a) and Dreher et al. (2008). The analysis
includes 40 countries for the period 1970-2006.
Our results confirm the presence of a relationship between globalization and decentralization. We also
find evidence of a role of democracy as a mediating factor between globalization and decentralization:
countries with stronger democracies are more likely to respond to globalization with actual decentralization
reforms.
2.
Theory and hypotheses
In this section, we provide a conceptual framework discussing the link between globalisation and
decentralisation. We explicitly present three theoretical arguments about how globalisation may affect
decentralisation.
The main focus of the research on globalisation and decentralisation looks at the ways in which
globalisation affects public budgets. The tax competition literature suggests that, as mobile factors may
attempt to avoid tax burdens by migrating from higher-taxed jurisdictions to lower-taxes jurisdictions,
globalisation may raise the difficulty of governments to increase taxes. Another way in which globalisation
may affect public budgets is through increasing the demand for public spending. Globalisation may generate
income inequality and, in turn, may stimulate the demand for social insurance for more vulnerable social
groups. The study of Bahl et al. (2002) and Arze et al. (2005), among others, corroborate these arguments.
Bahl et al. (2002), for example, discussing the role of subnational governments in the implementation of propoor policies, find, that in order to improve the standard living of the poor, subnational governments lower
taxes, and implement pro-poor expenditure policies. Similarly, Arze et al. (2005) find that the shares of
health and education services in total government expenditures increases with decentralisation. The
expansionary fiscal policy can also represent a mechanism for mitigating external shocks for more open
economies. As Rodrik (1998) argues, economies that are more open are more likely to be subject to external
shocks, and they increase government spending, especially in welfare and social security, in order to mitigate
such shocks. Thus, using the classical argument provided by Oates (1972), we suggest that globalisation may
raise decentralisation as local governments, being closer to the people and geography of their respective
jurisdictions, will be more responsive to the particular local preferences, and will be able to find new and
better ways to provide these services.
3
Some more recent studies have discussed the extent to which globalisation affects states by significantly
reducing their sovereignty and corresponding ability to make definitive and binding political decisions.
Opello and Rosow (1999) argue that ‘most people live in states whose sovereignty is regulated and
disciplined by norms of the international system and by the organizations of the global capitalist economy’
(ibid: 225). Thus, as globalisation may lead citizens to obtain more equal rights, better market infrastructures,
and more efficient provision of public goods at all levels of governments, it may ask for decentralisation to
increase efficiency and reliability. Studies such as McEwen and Moreno (2005), instead, suggests that
globalisation pressures can weaken a central state, and in order to contain sub-state national identities and
territorial demands, this latter can decide to diminish the importance of representation within central state
institutions.
While these studies shows how globalisation challenges the notion of states, the study of Beck et al.
(2007) discusses the role of institutions within the globalisation process. They have found that, in the context
of strong institutions, financial globalization allows better consumption smoothing and lower volatility for
the poor, but where institutions are weak, financial access is biased in favour of those with higher incomes
and assets. As a result, financial globalisation exacerbates inequality when institutions are weak.
3.
Definitions of decentralisation
A clear problem with a discussion of decentralisation is the vagueness around its meaning. Thus in
analysis of the impact of globalisation on decentralisation, it is important to determine what is actually
implied by the term decentralisation. The empirical and theoretical literature makes a distinction between
“decentralisation” and “federalism”. While “decentralisation” refers to the shift of political, fiscal, and policy
authority towards local governments and away from central government, “federalism” describes the
participation of the subnational government to the central government decisions or activities. Since these
concepts are strongly related, most empirical studies ignores such distinction.
Data on decentralisation and federalism are limited. Most empirical studies of decentralisation focus
exclusively on the balance of expenditures and revenues between governments. They rely on the IMF’s
Government Finance Statistics Yearbook to calculate the combined regional and local share of government
spending. Other studies suggest using own-source revenue as a share of total government revenue to account
for the role played by intergovernmental funds in expenditure decentralisation. Yet, another measure of
decentralisation is the share of total government revenue that is raised through revenue efforts of subnational
governments. While these measures are useful in pointing out the extent of subnational revenue autonomy, it
sheds little light on the local practises of decentralisation. As Rodden (2008) writes, “while subnational
governments may collect the revenues labelled as own source, the central government may nevertheless
maintain the power to set the rate and the base, leaving the subnational governments as mere collectors of
centrally determined taxes” (2008: 485).
A recent study calculates a composite measure of regional authority, which is the combination of four
modes of decentralisation (institutional depth, policy scope, fiscal autonomy, and representation) and four
components of federalism (law making, executive control, fiscal control, and constitutional reform). While
4
decentralisation indicators measure the autonomy of subnational governments under the institutional, policy,
fiscal, and political perspectives, the four components of federalism assesses the representation or the active
participation of local governments to the central government’s policy, fiscal, executive, and political
decisions or activities. This study looks at the composite measure of regional authority, which is a
combination of four decentralisation indicators1, and four components of federalism. It ranges from one to
twenty-four; higher is the value of this index, higher is the degree of decentralisation.
4.
Empirical strategy
In this section, we examine some of the factors explaining decentralisation and federalism through a
discussion of some theoretical and empirical studies on federalism. Many theorists of decentralisation and
federalism have pointed to how country size, income per capita, differences in preferences, and the level of
democracy influence the degree of decentralisation. As Alesina and Spolaore (2003) argue, country size is
positively related to the degree of decentralisation because of economies of scale in the provision of public
goods. Larger countries should have a larger number of jurisdictions within which a government provides all
public goods and policies. The traditional federalism literature corroborates this hypothesis suggesting that to
the extent that larger countries have larger jurisdictions, they enjoy larger spillovers. For Oates (1972),
income per capita, and differences in preferences have a positive effect on decentralisation. This is so
because they are key factors in determining demand for public goods.
Other scholars such as Bolton and Roland (1997), and Beramendi (2003) argue that decentralisation may
also be driven by regional economic differences. For example, higher income groups and regions may look
for decentralisation in order to protect themselves against undesired redistributive policies. On the other
hand, Tiebout (1956) suggests that the “voting by feet” process diminishes incentives for redistribution
(through taxes, public goods, and services provision) in communities when the level of income is high. Yet,
scholars such as Panizza (1999) focuses on the level of democracy as a factor in the degree of
decentralisation. According to Panizza (1999), democratic governments are perceived as ‘less power setters’
and rely more on the support of the group of people who elect them. As mentioned in section 2, another
important factor of decentralisation is country openness. For many scholars, economies that are more open
have larger spending government (in per capita terms) because since they are more open to international
shocks they need a larger stabilizing role of government. Summarizing, our simple theoretical framework
suggests that decentralisation is related to: (1) trade openness, (2) country size, (3) democracy. Therefore,
our baseline model is the following:
Decentralizationit=β0+β1Globalisationit+β2Sizeit+β3Democracyit+µ i+ηit
1
The four-decentralisation indicators are: “Institutional depth” index ranges from zero to three. It refers to the extent to which the central government
can exercise his veto on decisions and policies of lower levels of government. “Policy scope” index, ranging from zero to four, refers to the local
government’s responsibility for decision making in policy areas such as economics, education, welfare and local policing. “Fiscal autonomy” index,
ranging from zero to four, describes the extent to which the subnational governments have the power to set the rate and the base of (minor and major)
regional taxes. The index of “representation”, ranging from zero to four, assesses whether regional governments are involved in selecting regional
officials. The composite index of federalism ranges from zero to nine. It comprises four indicators: “Law making”, “Executive control”, “Fiscal
control” and “Constitutional Reform”. “Law making” index refers to the regions’ representation at the national level. “Executive control” refers to the
possibility that regional officers have meetings with the central government, and whether these are advisory or have veto power. “Fiscal control”
refers to the role of regions in negotiating over the territorial distribution of national tax revenues. “Constitutional reform” assesses authority over
institutions”.
5
In order to study the effect of democracy – as a proxy of the voice of the territory – as a mediating factor
for the impact of globalization on decentralization, we would also model the joint effect of different
indicators of democracy with globalization, as follows:
Decentralizationit=β0+β1Globalisationit+β2Sizeit+β3Democracyit* Globalisationit+β4Democracyit+µ i+ηit
In this model, our interest lies on β3, that we expect to be positive reflecting the intuition that the presence
of a stronger democracy reinforces the pressure of globalization on decentralization. In other words, the
stronger the democracy the stronger the voice of the territory to get more power and resources.
Many studies defined globalisation as either trade openness (trade as a share of GDP), or flows of foreign
direct investments. In this study, we use the KOF index of globalisation (Dreher 2006a and Dreher et al.
2008a) which measures globalization on a scale of 1 to 100, where higher values represent higher levels of
globalization. We use country population as a proxy for country size; democracy is proxied by an index
created by Polity IV project measuring authority patterns of a country ranging from an institutionalized
democracy and autocracy.
We estimate the coefficients associated to our explanatory variables using a fixed effects 2SLS estimation
regression, which allows controlling for unobserved variables. We use the lagged values of KOF index of
globalisation, year dummies capturing country-level common shocks, and country size as instruments for
globalisation. We then estimate the model by using the system GMM estimator as developed by Arellano
and Bover (1995) and Blundell and Bond (1998). We treat globalization as endogenous in GMM
specification of our model.
5.
Results
This section discusses our empirical findings, obtained first using a fixed effects 2SLS estimation (see
table 1), and second, GMM estimator (see table 2).
Column 1 in table 1 suggests that globalisation has a highly significant positive effect on decentralisation,
while country size – i.e. population - is negatively related to it. Our proxy of democracy is instead
statistically insignificant. Thus, this result suggests that globalisation tend to increase decentralisation
practices in small countries.
Next model, column 2, presents the second model discussed above, in which the joint effect of democracy
and globalization is included. The coefficient of democracy become significantly different from zero and has
a negative sign. When interacted with globalisation, it has the expected positive sign suggesting that the
strength of democracy can play an important role as a mediating effect between globalization and
decentralization2.
2
The hypothesis that decentralisation increases in small and more open democracies is confirmed when democracy is
proxied by the Freedom House index measuring freedom in countries according to two broad categories political rights
and civil liberties.
6
We obtained similar results when estimating the specification by using GMM estimator (see table 2). We
can see that regional authority index tends to respond negatively to democracy, but positively to the
interactive variable between globalisation and democracy. The positive and very highly statistically
significance of the coefficient of the lagged decentralisation suggests the dependence of past values of
decentralisation for decentralisation process itself.
Table 1. Fixed effects 2SLS estimation (Democracy from POLITY IV)
(1)
(2)
regional authority index
regional authority index
KOF index of globalization
(overall)
lpop
polity iv
0.147***
-0.014
(17.99)
(-0.20)
-3.847***
-3.361***
(-4.76)
(-4.03)
-0.147
-7.233*
(-0.32)
(-2.45)
polity iv * KOF index
0.161*
(2.42)
Constant
Observations
36.922***
39.560***
(5.08)
(5.49)
1067
1067
t statistics in parentheses
="* p<0.05
** p<0.01
7
*** p<0.001"
Table 2. GMM Estimation (Democracy from POLITY IV)
(1)
regional authority index
L.regional authority index
0.861***
(44.10)
KOF index of globalization (overall)
-0.032
(-1.87)
lpop
0.029
(0.06)
Polity IV
-2.385*
(-2.53)
polity IV * KOF index
0.046*
(2.36)
Constant
2.770
(0.60)
Observations
1028
t statistics in parentheses
* p<0.05 ** p<0.01 *** p<0.001
6.
Conclusions
The aim of this paper is twofold. It first aims to re-assess the relationship between globalization and
decentralization using a refined measure of decentralization, i.e. the Regional Authority Index. It then aims
to investigate what are the mechanisms, or channels, through which the demand for centralization, which is
supposed to stem from globalization, does indeed triggers a reform of the State. Our hypothesis is that
stronger democracies are more responsive to the pressure from local communities. Our results confirm the
presence of a relationship between globalization and decentralization. We also find evidence of a role of
democracy as a mediating factor between globalization and decentralization. This result is robust to both
different econometric strategies and different measures of democracy.
8
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